Custom Truck One Source, Inc.

Ladies and gentlemen, thank you for standing by. I welcome to Custom Truck OneSource's third quarter 2023 earnings conference call. Please note that this conference call is being recorded. I would now like to hand the conference over to your host today, Brian Perman, Vice President of Investor Relations for Custom Truck. Please go ahead.

Thank you. Before we begin, we would like to remind you that management's commentary and responses to questions on today's call may include forward-looking statements which, by their nature, are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results may differ materially. For a discussion of some of the risk factors that could cause actual results to differ, please refer to the risk factors section of the company's filings with the SEC. Please note that you can find reconciliations of the historical non-GAAP financial measures discussed during the call in the press release we issued today. That press release and our quarterly investor presentation are posted on the investor relations section of our website. We filed our third quarter 2023 10Q with the FCC this afternoon. Today's discussion of our results of operations for Custom Truck OneSource, Inc., or Custom Truck, is presented on an historical basis as of or for the three months ended September 30th, 2023 and prior periods. Joining me today are Ryan McMoneagle, CEO, and Chris Epperjesse, CFO. I will now turn the call over to Ryan. Thanks, Brian, and welcome everyone to today's call. I'd like to begin by thanking all of our employees, customers, and suppliers who continue to support our business, and helped us deliver another strong quarter. The entire custom truck team delivered record levels of production for the third straight quarter, which has enabled us to add new vehicles to our rental fleet to meet continued strong demand for new equipment and to fulfill our goal of providing unparalleled service to our customers. And we continue to demonstrate the value of the one-stop shop model with our ability to pivot between product categories and between selling and renting equipment as the markets dictate. For the third quarter of the year, we delivered strong year-over-year revenue, adjusted gross profit, and adjusted EBITDA growth. We generated $434 million of revenue, $150 million of adjusted gross profit, and $100 million of adjusted EBITDA in Q3 up 21%, 14%, and 9%, respectively, versus Q3 of last year. Our third quarter results align with our expectations that our business this year would reflect the benefits of improving supply chain performance, moderating inflation, and continued operational excellence by the team. Long-term demand remains strong in each of our strategically selected in-markets, utility, or T&D, infrastructure, rail, and telecom. We have experienced volatility over the past few months among some of our utility customers that impacted Q3 results and will be a headwind in the fourth quarter. But these markets continue to offer compelling long-term growth opportunities well in excess of GDP, which we believe should continue for the foreseeable future and is consistent with what the publicly traded utility contractors have reported this quarter. We see continued strong demand in our new equipment sales and backlog and in the performance of our rental fleet. As has been the case since late last year, in the third quarter, we continue to experience robust demand from our customers to purchase assets in the rental fleet. We see all these as positive leading indicators for sustained future demand. The ERS segment experienced 12% year-over-year revenue growth. we continue to see demand for rental equipment and we remain focused on rental pricing and the amount of time it takes to turn a piece of equipment and make it available to go back on rent, both of which positively impact rental adjusted gross margin. In the quarter, average utilization was just under 79%, which is historically very strong. As we discussed on last quarter's call, We experienced a decline in utility distribution equipment utilization in Q2, which we believe to be temporary and primarily related to our customer supply chain delays. This proved out in the third quarter. While average utilization was down sequentially, we ended the third quarter with utilization at over 81%, a 400 basis point improvement from the intra-quarter low. While new transmission projects continue to be announced, we did not see the normal uptick in transmission equipment utilization, which after speaking with our customers, we attribute to supply chain and funding delays on some projects and expect will pick up later this year and into 2024. We continue to invest strategically in our rental fleet and sell certain aged assets, albeit at a slower pace in Q3 relative to the first two quarters of the year. This resulted in the continued reduction of our fleet age to 3.5 years, which we believe remains the youngest in the industry. We expect to continue to invest in the fleet for the remainder of the year as demand remains robust. In the TES segment, we sold $231 million of equipment in the quarter, a 33% increase compared to Q3 2022, resulting in a 32% increase year to date. Additionally, gross margin improved by almost 160 basis points versus Q3 of last year. In line with our expectations that our TES backlog would start to moderate, backlog ended the quarter at $779 million, up 10% versus a year ago and down from last quarter. Record levels of production in our continued strong new equipment sales in the quarter allowed us to make headway towards reducing our backlog to a more normalized level. This past quarter's TES results point to continued good demand for new equipment. We are seeing new orders in certain end markets accelerate, while other end markets are slowing, again demonstrating the value of our one-stop-shop model. Our strong and long-standing relationships with our chassis Body and attachment vendors are key to our record production, and we continue to work closely with them to address supply chain issues as they arise. We continue to see an increase in equipment availability from our chassis and attachment suppliers, which positions us well to meet our production, fleet growth, and sales goals for the fourth quarter and into next year. Strategically, we remain focused on investing in and optimizing our production capacity and service footprint to ensure that we deliver the product and service levels our customers expect from us. As we discussed on last quarter's call, the work at the Union Grove location is complete and the new capacity is online. The expansion in Kansas City is expected to be completed this quarter. These investments will ensure that we have sufficient capacity to meet our future growth targets for both our rental fleet and new equipment sales, as well as be a catalyst for growth in our APS segment. As we look ahead to the rest of the year, we believe that our year-to-date results, favorable in-market tailwinds, robust customer demand, improving supply chain dynamics, and continued outstanding execution by our team all provide Custom Truck with the momentum to continue to deliver strong revenue, adjusted gross profit, and adjusted EBITDA growth. While Chris will discuss our 2023 outlook in greater detail based on year-to-date performance and the outlook for the remainder of the year, we are increasing our projected total revenue guidance range to $1.765 to $1.87 billion and affirming our adjusted EBITDA range of $425 to $445 million. In closing, we know our employees are the key to delivering the unequaled customer service and outstanding financial results we saw in the third quarter, and I'd like to extend a sincere thank you to them. I will now turn it over to Chris.

Thanks, Ryan. Q3 was another strong quarter. End market demand remained strong, resulting in total revenue of $434 million. of 21% compared to Q3 2022. Adjusted gross profit was $150 million, up 14% year-over-year, resulting in an adjusted gross margin for the quarter of over 34%. Adjusted EBITDA was $100 million, a 9% improvement compared to Q3 of last year. Adjusted gross profit and adjusted EBITDA growth lag revenue growth largely because of segment revenue mix. While all of our segments experienced year-over-year growth, rental asset sales and PES revenue, which have a lower average gross margin associated with them than our equipment rental business, comprise 65% of total revenue in Q3 2023 versus 59% in Q3 of last year. STNA was $57 billion in Q3 with 13.1% of revenues and improvement versus 13.9% in Q3 2022. Net income for the quarter was $9.2 million, the fourth consecutive quarter of positive net income. Ryan referenced our continued strong performance within our ERS segment. For the quarter, average utilization was just under 79%, which was the primary cause for a 4% sequential decrease in average OEC on rent. Year to date, average utilization is over 81%. Given the rebound we experienced in utilization at the end of the third quarter, average OEC on rent also rebounded, ending the quarter at just under $1.2 billion. On-rent yield was almost 41% for the quarter, a 230 basis point year-over-year improvement, which highlights the benefits from previously announced pricing actions implemented since the beginning of the year. Year-to-date realized rental rates on our core product which comprises P&D and related equipment representing 90% of our OEC, are up 7% versus the same period in 2022. We continue to invest in our rental fleet this quarter with net capex of $32 million. Our OEC and the rental fleet ended the quarter at $1.47 billion, up by $37 million versus Q3 of last year. We expect to continue to invest in the fleet during the fourth quarter and next year. For Q3, ERS rental revenue was $115 million, a 3% increase versus Q3 2022. ERS used equipment sales for Q3 remain strong at $52 million, up almost 41% year-over-year. ERS adjusted gross profit was $100 million for Q3, up 5% from Q3 of last year. Adjusted gross margin was 59.6% in the quarter and more than 185 basis points sequential improvement from Q2 as rental gross margin remains strong and rental revenue comprised a larger percentage of total ERS revenue in Q3 than in Q2. CES saw another very strong quarter with revenues of $231 million, which were up 33% from Q3 2022. This segment continues to benefit from strong backlogs continued robust inventory flows, and record levels of production. Gross profit increased by more than 46% in the quarter compared to Q3 of last year. Gross margin for the quarter was over 17%, a year-over-year improvement of almost 160 basis points. The improvement in PES gross margin reflects the implementation of ongoing production efficiency initiatives as well as maintaining pricing discipline. As Ryan mentioned, record levels of production and continued strong TES sales in the quarter allowed us to make headway toward reducing our backlog to a more normalized level. A backlog ended the quarter at $779 million, which is 10% higher than at the end of Q3 2022. We believe the persistent strength of the TES sales backlog reflects sustained long-term demand for equipment indicative of our favorable end market dynamics, our strong market share gains, and our pricing discipline. As this quarter's PES results show, we are confident we will be able to hold margins at or above the average we experienced for all of 2022 over the coming quarters, even with continued elevated levels of inflation. Our APS business posted revenue of $36 million, up 4% versus Q3 of last year. The adjusted gross profit margin in the segment remains strong and in line with expectations at 28% in Q3. Since initiating our stock repurchase program in the third quarter of last year, we have repurchased approximately $30.6 million of our stock, including $15.8 million in the quarter. We will continue to repurchase our stock when we feel the market price provides a compelling opportunity to create value for our shareholders. Borrowings under our ABL at the end of Q3 were flat compared to the end of Q2, with the outstanding balance at $492 million. As of September 30th, we had $255 million available and approximately $290 million of suppressed availability under the ABL, with the ability to upsize the facility. With LPM adjusted EBITDA of $433 million, we finished Q3 with net leverage of 3.3 times, an improvement of 1.3 turns since the close of the transaction with Nesco in April 2021, and down slightly from last quarter. Achieving net leverage below three times remains our target. However, given the level of share repurchase activity this year, as well as the continued investment in working capital and our rental fleet to meet demand, our ability to achieve our leverage target by fiscal year end will be delayed until later in 2024. The three times leverage target remains an important component in our assessment of how we best invest capital to grow our fleet, to expand our production capacity, to invest in working capital for future growth, to make prudent acquisitions, and to repurchase our stock, all with the goals of maintaining an appropriate level of liquidity and creating long-term shareholder value. With respect to our 2023 outlook, we believe ERS will continue to benefit from strong demand from our rental customers, as well as for purchases of rental fleet units, particularly older equipment, for the rest of the year. While we continue to expect to make gross investments in our rental fleet of more than $400 million this year, stronger-than-anticipated demand for rental asset sales will result in net growth in our rental fleet, based on ending OEC, being more modest than mid- to high single-digit percentage growth that we expected earlier this year. Regarding TES, continuing supply chain improvements improved inventory levels, and record backlog levels should improve our ability to produce and deliver more units than previously expected in the coming quarters. As a result of our improved outlook, we are updating guidance for our segments as follows. We expect ERS revenue of between 710 and $745 million, TES revenue in the range of 910 to $970 million, and APS revenue of between 145 and $155 million. As Ryan mentioned previously, this results in total revenue in the range of $1.765 to $1.87 billion, and we continue to project adjusted EBITDA in the range of $425 to $445 million. In closing, I want to echo Ryan's comments regarding our continued strong performance. Our successful combination with NESCO has put us on the path to continue to deliver strong revenue and adjusted EBITDA growth, to hold or expand margins in an inflationary environment, and to reduce leverage, all while providing the highest levels of service to our customers. With that, I will turn it over to the operator to open up the lines for questions.